EC Big Bank Q4 Earnings Preview

The New York Stock Exchange building.

The large money-center banks that will kick off the Q4 2020 earnings season for the sector this week have suffered a significant hit to profitability as a result of the pandemic. The Q3 earnings season three months back showed business conditions starting to stabilize, with revenue weakness resulting from soft demand conditions partly offset by decelerating loan-loss provisions and effective cost controls.

Business conditions likely weakened in Q4 in response to the surging infection rates, a development that has been showing up in high-frequency economic data as well. Friday’s negative labor market reading is just the latest on that front.

While business conditions remained difficult in 2020 Q4 and are likely remain so in the first quarter of 2021 as well, the market has learned to look past this painful period to when the ongoing vaccination exercise will reach a critical mass and put the country on the recovery path. Importantly, the market has started discounting a far more expansive fiscal policy regime from the incoming administration following the Georgia runoffs.

Bank stocks have been big beneficiaries of upgraded market sentiment, with these stocks reversing their earlier underperformance to emerge as market leaders. You can see this in the chart below that plots the one-year performance of JPMorgan (JPM) and Citigroup (C), which will report Q4 results before the market’s open on January 15th, relative to the S&P 500 index.

As you can see here, the two banks have lagged the S&P 500 in a notable way over the past year. But a more recent reading of this relationship presents a different look, as you can see in the chart below that tracks this performance over the last three months.

As noted, this performance momentum reflects the market’s macro expectations for the coming quarters and not any optimism about banks’ Q4 results. As such, we wouldn’t expect this favorable trend to reverse course in response to quarterly results, unless management teams paint an extended downbeat outlook.

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